Will Shaw’s speed push threaten Telus’ dividend growth?

While Telus Corp. may be attracting more customers to its television offerings, Shaw Communications Inc. is battling back by making its Internet connections a lot faster. And this may have investors wondering if the need for speed will lead to higher spending and therefore slower dividend growth.

“Telus TV has been taking share from Shaw for the last year and remains a superior product, in our view,” said Jonathan Allen, an analyst at RBC Capital Markets. “But faster Internet speeds at Shaw is a way to offset some of the Telus TV advantage until TV can catch up.”

Beginning in June, Shaw will kick off a 16-month plan to convert roughly 560,000 analog-only customers on its network to digital. Shutting down the old analog signals, which take up two-thirds of the network, will free up a lot of space that can be used to increase Internet speeds, as well as provide more HD, 3D and on-demand content.

While Phase 1 will see Shaw offer plans ranging from 50 megabits per second to 100Mbps, the company is set to offer a 250Mbps option during Phase 2, which is set to begin on Aug. 2011.

Telus will have a difficult time matching these new high speeds using just fiber-to-the-neighbourhood (FTTN), Mr. Allen told clients. FTTN typically serves a few hundred customers in the vicinity and averages 25Mbps into the home, before TV.

Even with planned upgrades and pair bonding to 50Mbps, this is a far cry from the 100 and 250Mbps speeds Shaw will offer, the analyst said. He added that even Shaw’s 50Mbps service would be difficult for Telus to match.

So does Telus need to advance its fiber-to-the-home (FTTH) strategy at a cost estimated at more than $1.4-billion?

Mr. Allen said the company’s dividend growth plan seems secure. However, he noted that Telus based its outlook on earnings per share growth, not capital expenditures. He also thinks Telus will likely have to start spending more on FTTH to remain competitive.

For now, the analyst is sticking with Telus given its advantage in TV, the fact that FTTH may not be needed, and since customer take-up for higher prices and speeds from Shaw is unknown. His positive view on Telus is also primarily based on its wireless business.